Treasury resumes SLGS sales for muni issuers

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WASHINGTON – The Treasury Department resumed sales of state and local government series securities for tax-exempt bond issuers at noon on Monday.

The department had suspended SLGS sales more than six months ago on March 8, 2017 when it began taking extraordinary measures as the federal debt approached the debt limit.

But Treasury’s Bureau of Fiscal Services announced it would begin accepting applications for new issues of SLGS on Monday after President Trump signed into law H.R. 601 into law on Friday, which temporarily suspended the debt limit, at almost $20.2 trillion according to the Treasury, past the beginning of fiscal 2018 on Oct. 1 and through Dec. 8.

The new law also contains $15.25 billion in aid for Hurricanes Harvey and Irma and three months of continued appropriations for the federal government, also through Dec. 8.

SLGS are specially tailored, non-marketable securities that can only be purchased by state and local governments of other muni issuers subject to yield restriction and arbitrage rebate restrictions under the Internal Revenue Code.

SLGS are most often bought by issuers for advance refunding escrows, which are subject to yield restriction requirements. The issuers want to make sure their investment yields don’t exceed their bond yields. But issuers can also invest in SLGS with bond proceeds to avoid generating arbitrage.

Sam Gruer, a managing director of Blue Rose Capital Advisors in New Jersey, said he’s glad to see SLGS sales again because his firm has been doing a lot of advance refunding business.

“We’ve been very busy with escrows and I imagine our competitors have been very busy as well,” he said.

Gruer said SLGS “help a lot of the small issuers or issuers with short escrows because, while they’ve been able to secure open market Treasuries for them, they may have paid more money than they would have if they had SLGS,” he said.

“For medium to large issuers – those with escrows of $12 million or more – it behooves them to dual track both SLGS and open market Treasuries and make the decision of which way to go at the time of bond pricing.”

Gruer added, however, that rates are still relatively low, and “there’s still a lot of negative arbitrage in escrows” making it less likely that issuers will have concerns about violating yield restriction or arbitrage rebate requirements.

Suspension of SLGS sales typically are the first extraordinary measure that the Treasury takes when it is approaching the debt limit. Since 1995, the Treasury has closed its SLGS window 12 times.

As the administration approaches the new Dec. 8 deadline, SLGS sales will likely again be suspended.

In a Q&A on SLGS on its website, the Treasury said, “While SLGS suspension will not prevent a state and local government from issuing new municipal bonds, it might increase cost and cause inconvenience.”


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